2018-06-05

Yin Yang Tax Evasion Contracts

China’s tax authorities have launched a probe into the fiscal affairs of the film and TV industries, following allegations that leading actress Fan Bingbing engaged in contract chicanery to hide a massive payday.

China’s State Authority of Taxation announced the industry-wide move Sunday. It ordered local tax bureaus to investigate so-called Yin-Yang contracts – in essence, double contracts for the same work.

Fan, China’s biggest celebrity and co-star of Jessica Chastain’s forthcoming action film “355,” reacted furiously last week when details of a contract were leaked online by TV anchor Cui Yongyuan. His initial disclosure showed Fan being paid $1.56 million (RMB10 million) for four days’ work on Feng Xiaogang-directed “Cell Phone 2.” Cui followed up by releasing a second contract worth $7.8 million (RMB50 million) for the same work. He suggested that the intent was to allow Fan to declare only the smaller contract to tax authorities, rather than her full $9.3 million (RMB60 million) compensation.

The disclosure of fraudulent conduct often foreshadows the bursting of an asset bubble. If so, the revelation of widespread dodgy property transactions on the mainland designed to cheat the taxman may be a signal of worse news to come. So-called 'yin-yang' contracts are a common but illegal practice to avoid paying taxes. Officials have long known about it, apparently, but have done little for fear of upsetting shaky market sentiment during the financial crisis. They may soon have to pay a much higher price for not cracking down on the practice.

In such a scam, a flat buyer and a seller agree to sign an under-the-table contract, which states the true value of their transaction. But they also produce another contract that understates the value for official registration. In doing so, the seller avoids paying the full capital gains levy, which is counted as part of personal income tax. The buyer has an incentive to go along because, on the mainland, most or all the costs of a property transaction are offloaded onto buyers, including the seller's tax from any capital gain.

For those who can read Chinese (Google translate isn't too helpful when it comes to the details), 21st Century has an in-depth article explaining how the yin-yang contracts work in the Chinese entertainment industry: 明星“阴阳合同”引发蝴蝶效应